1. Watch for a Worldwide Recession
Ruchir Sharma, head of emerging markets equity and global macro, Morgan Stanley Investment Management:
“We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment, and population decline are combining to undermine growth, while relatively low-debt countries from Eastern Europe to South Asia look better positioned to weather the inevitable next turn in the cycle.”
2. Fixed Income Faces a Rocky Road
Dan Fuss, vice chairman at Loomis Sayles & Co. and co–portfolio manager of the $20 billion Loomis Sayles Bond Fund:
Yields on the benchmark 10-year Treasury note will likely rise to 2.6 percent to 2.8 percent by the end of 2016, Fuss says, although he cautions that the current geopolitical turmoil makes forecasting especially difficult.
For investors with a bond portfolio in these rocky times, Fuss recommends a mix of Treasuries, investment-grade corporates (with maturities of five to 12 years), and high-yield debt has the best chance of success in 2016.
And you’ll need to be especially picky when it comes to high-yield bonds instead of relying on an index fund, he says. “It’s quite clear that high yield has the best value relative to stocks, but there’s a lot more scatter there.”
3. Know Which Equities to Watch
Thomas J. Lee, managing partner at Fundstrat Global Advisors:
“Equities are going to do really well in 2016, especially banks and blue-chip businesses. Banks will benefit from the Fed tightening and will boost their returns on equity as the economy expands. And when you look at blue chips, they’re going to have the ability to generate stronger returns as the economy picks up.”
4. The EU Faces Its Biggest Challenge Yet
Rebecca Patterson, chief investment officer of Bessemer Trust, which oversees more than $100 billion in assets:
The biggest risk for Europe in the year? "It's the refugee crisis," says Patterson. "I think it's the biggest challenge to the European Union yet. The horrible terrorist attacks in Paris increased the risk that the refugee crisis could result in a political and/or policy shift, or simply lead consumers to change their spending patterns.
Either could weigh on sentiment around European growth and corporate profits."Patterson is on alert for any such changes but remains overweight European equities and positioned for a weaker Euro, she says."
The Paris attacks sadly shone a light on the European refugee crisis; I assume more investors globally now are thinking more about what millions of immigrants can mean for an economy and respective markets. However, I am still not sure that investors globally have adequately thought through what market spillovers the European refugee crisis could trigger over the coming year."
5. Expect a Lift
Jim Caron, a managing director at Morgan Stanley Investment Management:
“I believe inflation risk premia will return to the markets. This should provide upward lift for 30-year Treasury yields, possibly toward 3.75 percent. The markets may also be surprised by how slowly the Fed hikes rates in the face of what we think will be an improving economic climate.”
6. Unicorns Will Have Their Moment—or Not
Alan Patricof, co-founder of Greycroft Partners:
“I am concerned about the overexuberance in financing of startups. There are just too many at the moment, and there isn’t enough money to sustain them. I think inevitably we’re going to see more of these unicorns”—startups valued at more than $1 billion—“try the public market, and that will finally tell us whether they can support themselves. By the way, I don’t think there’s enough money around to sustain all of them. We’re going to find out which unicorns can make it.”
7. The Search for Yield Will Intensify
Russ Koesterich, global chief investment strategist at BlackRock, the world’s largest money manager:
“The Fed is going to be less important in 2016,” says Koesterich, who expects Janet Yellen & Co. to raise interest rates incrementally. He predicts global growth will stay sluggish, increasing the thirst for higher-yielding assets.
Investors who have relied on high-coupon bonds they bought before the financial crisis are running out of those securities, he says—and there’s little to replace them that are a slam dunk. “You won’t be able to find income without risk.
Asset classes from [master limited partnerships] to high-yield bonds each have their own risks—and none of them are cheap. You’re going to have to have a multi-asset-class, diversified-yield play.”
8. Get Energised
Barbara Byrne, vice chairman of investment banking at Barclays Capital:
“We will begin to see a recovery in the prices of natural resources for largely—and critically important—political reasons. We’re beginning to see sovereign wealth funds decline—Norway, Saudi Arabia.
I think we’ll see a reversal on that; countries will not be able to afford fluctuations in their reserves. We’ll probably move to a more stable oil price, which I would say is $60 per barrel. And I think energy assets that are investing in sustainability at the same time that they’re focusing on meeting the needs of the current demands will probably do well.”
9. Study Latin America
Tulio Vera, chief global investment strategist for the J.P. Morgan Latin American Private Bank:
“There’s a ray of sunshine from Argentina,” says Vera. “That’s not only important for the country but also for the region.” While Vera says the investment landscape in Brazil remains uncertain, he sees Mexico continuing to benefit from the U.S. economic recovery, especially in the auto industry.
“There will be some very interesting entry points in Latin American assets between now and the end of next year,” he says. “We are getting closer to a re-entry moment for some of these markets.”
10. Growth Is Coming … in 2017
Joseph LaVorgna, chief U.S. economist at Deutsche Bank:
“I’ve got growth accelerating a bit because it seems like there are reasons that the economy should get better, but it’s concerning that 2010 was the best year for growth since before the recession. As I look forward, the message is ‘more of the same,’ with maybe some optimism into 2017 that whoever the U.S. elects president will pursue growth policies, since this economy hasn’t done well.”
11. Impact Investing Will Target Cancer
Mark Haefele, global chief investment officer at UBS Wealth Management:
“The world’s populations are aging, and demand for cancer treatments will only increase,” says Haefele. “Yet the supply of capital for the riskiest stages of development is limited.”
Health-care companies tend to focus on later-stage research, providing an opportunity for earlier-stage investors to earn an attractive long-term return—and benefit society.
“This type of practice”—known as impact investing—“is likely to become more popular as investors seek to align their portfolios with their social values as well as generating a return,” says Haefele.
12. China Will Be Just Fine
Yang Zhao, chief China economist at Nomura Holdings, which cut its 2016 GDP forecast to 5.8 percent from 6.7 percent on Oct. 6:
“Is there going to be a hard landing in China? I don’t think so. The labor market remains largely balanced; even with 5.8 percent GDP growth, the economy will create jobs, especially in the labor-intensive services sector. And it’s unlikely that China’s financial industry is headed for a crisis because most of the country’s institutions are backed by the government. Should any systematically important financial institutions have any problems, we believe that the government will step up to rescue them.”
13. Think like a Millennial
Katie Koch, a managing director at Goldman Sachs Asset Management, which oversees almost $100 billion in global stocks:
“The rise of the millennials will have long-term investment implications,” Koch says. “Their spending trajectory is getting steeper and increasing compared to baby boomers, which are decreasing their spending as they retire.”
In 2016, Koch is especially keen on Netflix, Nike, H&M, and PChome Online, a Taiwanese e-commerce company, because they prioritise instant information, quick consumption, and healthy living—themes that resonate with the 2 billion people worldwide born from 1980 to 2000.
14. More of ‘Whatever It Takes’ From the ECB
Erik Nielsen, chief economist at UniCredit:
“Expect further divergence between the Fed and the ECB, with the former hiking rates a couple of times next year and the latter expanding its balance sheet more than it has presently announced.”
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